Branching Out the Banks

Banks are the epitome of the financial industry, for they manage and secure our money to a specific place. Banks have made way throughout history as becoming the safest form of keeping your wealth safe, not through vaults, but by opening bank accounts to either deposit or withdraw your money.

“Commercial banks” is the specific term for these. They have now grown in number during these days, and because of this, they have opened a number of branches throughout the nation. Well, not only here in the United States, but perhaps to other countries as well.

Branching out means that the main bank office spreads throughout the nation by opening smaller bank that also have the same name as the head office, of which the latter also owns. It is then a small form of replication of the original bank. Because of this, banks have maximized their influence across the countries, and that they are no longer confined to only a specific or single location, but rather encompasses a large enough territory to accommodate a lot of potential investors or clients.

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Credit Cards – A Technological Breakthrough

The world that we live in had totally come a long way, for we were once people who used animals and different kinds of things for the exchange of goods. Then we progressed, and used metals, in the likes of gold and silver coins. These were our ways of the past. And we use these to buy something. This was the financial world, that are distant ancestors were accustomed to.

As time went by, we have grown ever more conscious on the convenience on the processes of exchanges. We wanted it to be not only convenient in production, but we also wanted it to be portable. And so, we created paper bill, or the money paper that every nation in the world uses now. Because of this, we no longer needed to bring with us heavy bags of gold and silver coins, but instead we use thin wallets, with paper money in it. It just is a big revolutionary step for all of us as it made the exchange of goods much easier.

We thought that this was the ultimate revolution as the switch from bringing heavy metals with us to buy something, turned into just paying bills. Then we progressed much further, and thought of ways on how to reduce these sums of paper bills into a single piece of thin object. And so we built the credit card.

It’s much more complicated than this, of course, but if you want a bunch of great material on credit cards, EMV technology and how to process them look at RedFynn.com. They explain credit cards and payment processing in a way anyone can understand!

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Goodbye to the Yellow Brick Load

Goodbye to the Yellow Brick Load

At a conference meeting with Franklin Raines, then CEO of Fannie Mae, I asked him if he was concerned about the mortgage servicing rights business model.  His response was, “It’s not a Fannie Mae problem, we’re guarantors.”  I remember thinking to myself, “Spoken like Oz – and I’m not in Kansas anymore.”

Two weeks ago, the American Banker posted a story on Fannie Mae’s secretive move to correct flaws built into the current loan servicing business model.  Mortgage Servicing Rights (MSRs), once a mortgage yellow brick road of finance, have become the dirty brick load with structural flaws weighing on the economic recovery.

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This tactical shift will involve some upfront costs.  It has the potential to expand and extend the role of the GSE’s into one more aspect of the mortgage market, a market that already has too much of the wrong kind of government involvement, but this move is taking the industry and the loan servicing issue in the right direction and should not be a clandestine affair.

Until the collapse of the mortgage markets in 2008, a flawed economic analysis of tail-risks and operational requirements allowed MSRs to be mispriced and mismanaged.  The unforeseen secondary effect was the failed business model contributed significantly to the collapse in all housing values and they have been crushing folks like the witches in Oz since then.

At the center of the conflict was the mistaken assumption that Loan Servicers, having economic “skin in the game” would allow enlightened self-interest to regulate a complex process.  The financial evolution envisioned a hybrid type of investment manager, credit manager, cash flow manager, high touch problem solving operations manager and low touch digital efficiency platform to all come into play to manage this complex value chain.  Instead we got highly leveraged Scarecrow-like (brainless), bail-out-required, solution.

Like the flawed characters in Oz, the MSR layered-risk business model was designed to collapse under stress.  Like squashed munchkins, the process occurred with smaller non-depository servicers.  This is because at the first sign of trouble, the operational financing liquidity that was needed to manage the loan servicing cash flow obligations dried up.  But, the same cash flow challenges were beneath the surface in larger depository institutions and with falling prices the laissez-faire approach to capital allocation encouraged still greater concentrations of exposure.

While the concept of such a business model is easy to discuss in theoretical terms, the execution tends to break down as large institutions reach for efficiency ratios that poorly correlate to the potential natural-disaster-like operating dynamics possible.

More complex than the mistakes of the Wizard, Loan Servicers were over-leveraged in every aspect of their “skin” with the potential to develop skin cancer in each and all of the fundamental servicing value components.   As market “chaos” hit every element of the value chain, the entire housing sector collapsed. Restoring housing requires a structural change in the loan servicing process.

Fannie Mae’s transference of Mortgage Servicing Rights to Special Servicers, compensated on a fee for service basis, may be the beginning of a better process for the housing market.  This approach starts to allow work to be allocated in a Ricardo-like fashion, where specialists in the task at hand can intelligently add value.

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The new Basel regulatory capital requirements are already calling for a change in how MSRs are valued for capital purposes.  A number of large depository institutions need to lighten up their investments in MSRs.  It’s time to use our hearts, heads and courage the way Dorothy would.  The fee-for-service model can be a way out of the problem for everyone, provided the GSE’s are allowed the economic capacity to move servicing and ensure operating cash flows.

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